General

24/05/2010 - Are the policies that governments have put in place to stabilise the global economy and restore growth sowing the seeds for a new economic crisis? While more welfare spending and easier credit can temporarily help to shore up economic activity, they could in the medium term make the problems that caused the current crisis worse, argues William White, chair of the OECD’s Economic Development and Review Committee.

If that were to happen, warns Mr. White in an article published in the OECD Observer, “the global economy would then still be on an unsustainable growth path, with future crises likely.” Such an outcome can be avoided, he maintains, but this will require careful management on the part of governments.

As Economic Adviser and Head of the Monetary and Economic Department at the Bank for International Settlements until 2008, Mr. White is credited as being one of the few who warned ahead of time of the crisis that hit the world economy two years ago.

In his article, he suggests that “exit” policies – unwinding the emergency measures taken by governments to shore up their national economies – will need to be considered much sooner many analysts think.

Governments, he suggests, should focus on those kinds of demand and those forms of stimulus that do not make existing imbalances even more unsustainable. In parallel, they must take steps to reduce the burden of debt to more manageable levels, particularly by pursuing structural reforms to increase potential growth. Finally, Mr. White hints, there may be a positive advantage in letting some of the biggest debtors go bankrupt or engage in major debt restructuring.

“While distasteful to many, (enhanced recourse to bankruptcy and debt workouts) can be to the mutual advantage of creditors and debtors, and done in such a way as to minimise moral hazard and the risks of encouraging further crises,” Mr White argues. “Debt alleviation frees up productive resources for other uses, and it reduces the debt–and also the uncertainty about debt servicing–that inhibits spending. Evidently, if carried far enough, confronting frankly the debt problem of borrowers requires the restructuring and possible bankruptcy (or nationalisation) of lenders as well. While challenging, such a process would seem better than the alternative of refusing to face up to reality: if the money is already gone, the only relevant question is how the losses are to be distributed.”